Posts Tagged ‘environmental economics’

Australia held a general election on 2 July 2016. The Liberal/National coalition narrowly won in the House of Representatives, gaining a substantially reduced majority of 77 of the 150 seats, to Labor’s 68 and other parties’ 5 seats. One campaign issue for all parties was the destruction of the Great Barrier Reef, which is seen as an environmental disaster. Each party had proposals for tackling the problem and we examine some of them here.

The Great Barrier Reef is the largest coral reef in the world. As the BBC’s iWonder guide states:

One of the world’s seven natural wonders, the Great Barrier Reef contains some 900 islands and 3000 smaller reefs. It is larger than the UK, the Netherlands and Switzerland combined, home to around 10% of the world’s marine fish, over 200 bird species and countless other animals, including turtles and dolphins.

But this iconic Reef system is facing unprecedented threats. Together with governments, scientists are playing a key role in the battle to preserve this vulnerable ecosystem before it’s too late.

The Reef is 2300km long. In the northern third, around half of the coral is dead. Few tourists see this, as they tend to dive in the southern third, which, being cooler, is less affected.

The bleaching and destruction of coral reefs has a number of causes. These include: rising water temperatures, generally from global warming and more extreme El Niño events (rising warm waters that periodically spread across the Pacific); pollution, including that from coal mining, industrial effluent and run-off of pesticides, herbicides, fertilisers and sediment from farming, leading to acidification of waters; more frequent and more violent cyclones; rapidly expanding numbers of coral-eating Crown of Thorns starfish; and over fishing of some species of fish, leading to knock-on effects on ecosystems.

The Barrier Reef and the oceans and atmosphere around it can be regarded as a common resource. The warming of the atmosphere and the oceans, and the destruction of the reef and the wildlife on it, are examples of the ‘tragedy of the commons’. With no-one owning these resources, they are likely to be overused and abused. Put another way, these activities cause negative externalities, which do not appear as costs to the polluters and despoilers, but are still costs to all who treasure the reef. And, from a non-human perspective, it is a cost to the planet and its biodiversity. What is in the private interests of the abusers is not in the social or environmental interest.

The Australian government had sought to downplay the extent of the problem, afraid of deterring tourists – a valuable source of revenue – and under pressure from the coal and farming industries. Nevertheless, in the run-up to the election, the destruction of the Reef and what to do about it became a major debating point between the parties.

The Coalition government has pledged A$1bn for a new Reef fund, which will be dedicated to tackling climate change and water quality.

The fund will also help coastal sewage treatment plants to reduce ocean outfalls with efficient pumps, biogas electricity generation and next-generation waste water treatment. Improving water quality will enhance the Reef’s resilience to climate change, coral bleaching and outbreaks of the destructive crown of thorns starfish.

But how much difference the fund can make with the money it will have is not clear.

The Green Party goes the furthest. In addition to the Labor Party’s proposals, it wants to impose taxes on coal firms equal to the cost of the damage they are causing. The tax revenues would be paid into a multi-billion dollar fund. This would then be spent on measures to rescue the Reef, invest in clean energy projects, stop damaging industrial development, improve farm management and stop polluted run-off into the Reef catchment area by investing in water systems.

Promises at the time of an election are all well and good. Just how much will be done by the re-elected Coalition government remains to be seen.

Is slower economic growth a cost of cutting greenhouse gas emissions? Apparently not – at least according to two studies: one by DIW Econ, a German institute for economic research, and the other, earlier this year, by the International Energy Association (see reports below).

The IEA study found that, despite global GDP having grown by 6.4% in 2014, global emissions remained flat. The DIW Econ study found that from 2004 to 2014, OECD countries as a whole grew by 16% while cutting fossil fuel consumption by 6% and greenhouse gas emissions by 6.4%.

But what does this mean? If growth accelerated, what would happen to greenhouse gas emissions? Would they begin to rise again? Probably.

The point is that various developments, largely independent of economic growth have been reducing the greenhouse gas emissions/GDP ratio. These developments include: technological advances in energy generation; the switch to alternative fuels in many countries, thanks, in large part to lower renewable energy costs; increased energy efficiency by consumers; and a continuing move from energy-intensive manufacturing to less energy-intensive services.

So if governments forced more radical cuts in greenhouse gases, would this reduce the rate of economic growth or have no effect? For a given level of technological advancement, the initial effect would probably be a reduction in economic growth. But to the extent that this encouraged further investment in renewables and energy saving, it might even stimulate economic growth over the longer term, especially if it helped to bring lower energy prices.

A big problem in decoupling economic growth from fossil fuel usage is that developing countries, which are taking a growing share of world manufacturing, are more heavily dependent on coal than most developed countries. But even here there seems to be some hope. China, the biggest manufacturer in the developing world, is rapidly increasing its use of renewables. As the IEA press release states:

In China, 2014 saw greater generation of electricity from renewable sources, such as hydropower, solar and wind, and less burning of coal.

If the world is to tackle global warming by making significant cuts in greenhouse gases, there must be a way for developing countries to continue growing while making less use of fossil fuels.

What are the possible causal relationships between cutting greenhouse gas emissions and the rate of economic growth?

What incentive mechanisms can governments or other agencies adopt to encourage reductions in greenhouse gas emissions without reducing economic growth?

Can a cap and trade system, such as the European Emissions Trading Scheme help to achieve a given level of emissions reduction at minimum cost to economic growth? Explain.

How might the developed world support developing countries in moving to a low carbon technology?

What factors lie behind the falling costs of renewable energy? Are these the same factors that lie behind the falling cost of oil?

What political problems might hinder the greater production of renewable energy?

How might an economist set about determining a socially optimal amount of fossil fuel production? What conceptual and philosophical problems might there be in agreeing what is meant by a social optimum?

Since the Global Financial Crisis, and especially since 2010, there has been a significant decline in the volume of commercial freight carried by aircraft. Whilst regional and national economies have been hit by fiscal problems, credit snarl-ups and twitchy consumer demand, increases in the price of crude oil (until recently) have compounded air freight cost increases, leading to substitution towards the main alternatives.

Whilst some multinational businesses have shifted production back ‘on-shore’, there has been unprecedented growth in sea freight. In the latter case there are, of course, both ‘winners’ and ‘losers’. As the world’s seas and oceans become more and more congested, one of the distinct losers is a large species which shares the water with commercial maritime transport: the whale.

A recent ‘Sharing the Planet’ documentary on BBC Radio 4, highlighted the plight of whales in the world’s open waters. Since the imposition of controls upon the whaling industry, whale numbers had stabilised and even increased. However, the past five years has seen the most significant threat coming from the eerily clinical-sounding ‘ship strike’: that is, unintended incidents of ships hitting and either injuring or killing whales. In particular, the Blue Whale and the Right Whale have been most affected – the Right Whale was almost driven to extinction by ship strikes in the North Atlantic region.

International action is driving a regulatory approach which aims to intervene, for example, to impose speed restrictions in known waters where whales congregate. But this isn’t a universal solution. Even where it is applied, enforcement is tricky and there is industry resistance as already slow shipping freight delivery times are further extended, thus challenging producers under pressure to respond rapidly to changing consumer demand in the world of ecommerce.

But where is the link to the movie Frozen? Well, this year’s top-selling range of toys are tie-ins to Disney’s wintery animated blockbuster. Excess demand for some of the tie-in merchandising has led to short supply in toy stores and carefully planned production and shipping plans junked. Panicked creation of extra capacity in off-shore production has had to be complemented by the contracting of air freighting options – the lead times are too long to get last-minute products to distributors and retailers in time. Whilst someone has to bear the increased financial cost, the whale might therefore become – at least temporarily – a beneficiary.

But the message is clear: globalised production and distribution involve a complex web of trade-offs. Where negative externalities hit those without a global voice, this adds weight to the continued efforts towards sustainability and the full costing of production and exchange. Whales are a ‘flagship species’ in diverse ecological systems. The planet cannot afford to lose them. And so, whilst your gift purchases this festive season may have been made possible by products having been air-freighted rather than being sent by yet another ship, don't rest on your laurels. Consider this variant on a traditional injunction: whales are for life, and not just for Christmas.

The UK hosted the third Clean Energy Ministerial conference on 25/26 April 2012. More than 20 energy ministers from around the world attended. In his address, David Cameron, gave his backing to more wind farms being built in the UK, both onshore and offshore.

Currently just under 10 per cent of the UK’s electricity is generated from renewable sources. But to meet agreed EU targets this must increse to at least one-third by 2020. Most of this will have to come from wind.

But whilst wind turbines create no CO2 emissions, electricity generated from wind is currently some 15% more expensive than from gas. To make wind power profitable, energy companies are required by law to generate a certain percentage of their electricity from renewables and the cost is passed on to the consumer. This adds some £20 per year to the average household energy bill.

Over the coming years, many new power plants will have to be built to replace the electricity generated from older plants that reach the end of their life. So what types of plant should be built? Unfortunately measuring the costs and benefits from power generation is not easy. For a start, energy needs are not easy to predict. But more importantly, electricity generation involves huge environmental and social externalities. And these are extremely difficult to measure.

What is more, the topic is highly charged politically. The social costs do not fall evenly on the population. People might favour wind turbines, but they do not want to see one outside their window – or from their golf course!

The following videos and articles will give you some insight into the difficulties that any decision makers face in making the ‘right’ decisions about electricity generation

My son Andrew Sloman (see also) is currently in Goa. My wife Alison and I went to visit him over half term – our first trip to India. Goa is a beautiful state, with wonderful beaches, fantastic food and perfect weather in February. But inland from this tourist haven lies an environmental disaster caused by the open-cast extraction of iron ore.

This tiny state by Indian standards produces more than 60% of India’s iron ore exports. Whilst, along with tourism, the iron ore industry has been one of the largest contributors to the Goan economy, its environmental footprint is massive. Deforestation and water and air pollution are just three of the environmental externalities.

So should a cap be placed on the amount of iron ore that is mined? Should the industry be taxed more heavily? Should tough environmental standards be imposed on the industry? Or should it simply be allowed to continue, given its large contribution to the Goan economy? Or, at the other extreme, should the industry be closed? The linked article looks at some of the issues. Try to identify, as an economist, what information you would require in order to come to a conclusion to these questions.

What negative externalities are involved with the Goan iron ore industry? Are there any positive externalities?

What difficulties are there in measuring the negative externalities?

How would you set about doing a cost–benefit analysis of (a) expanding the Goan iron ore industry; (b) shutting it?

Explain the following: “The net present value of the opportunity cost for 25 years at 12% social discount rate of giving it up is greater than its environmental cost by Rs 14,449 crore, the report states.” (A crore is 10 million and Rs is the symbol for an Indian Rupee, where £1 = approximately 78 rupees.)

What difficulties are there in attempting to take distribution into account when doing a cost–benefit analysis?

The health of an economy is generally measured in terms of the growth rate in GDP. A healthy economy is portrayed as one that is growing. Declining GDP, by contrast, is seen as a sign of economic malaise; not surprisingly, people don’t want rising unemployment and falling consumption. The recession of 2008/9 has generally been seen as bad news.

But is GDP a good indicator of human well-being? The problem is that GDP measures the production of goods and services for exchange. True, such goods and services are a vital ingredient in determining human well-being. But they are not the only one. Our lives are not just about consumption. What is more, many of our objectives may go beyond human well-being. For example, the state of the environment – the flora and fauna and the planet itself.

Then there is the question of the capital required to produce goods and maintain a healthy and sustainable environment. Capital production is included in GDP and the depreciation of capital is deducted from GDP to arrive at a net measure. But again, things are left out of these calculations. We include manufactured capital, such as factories and machinery, but ignore natural capital, such as rain forests, coral reefs and sustainable ecosystems generally. But the state of the natural environment has a crucial impact on the well-being, not only of the current generation, but of future generations too.

In the video podcast below, Professor Sir Partha Dasgupta, from the Faculty of Economics at the University of Cambridge and also from the University of Manchester, argues that the well-being of future generations requires an increase in the stock of capital per head, and that, in measuring this capital stock, we must take into account natural capital. In the paper to which the podcast refers, he argues “that a country’s comprehensive wealth per capita can decline even while gross domestic product (GDP) per capita increases and the UN Human Development Index records an improvement.”

Until changes in their governments, both the USA and Australia were unwilling to sign up to the Kyoto Treaty on climate change. But things are changing. In both countries, cap and trade bills have been proposed by their administrations (see A changing climate at the White House). In the USA, President Obama’s bill would see the imposition of carbon quotas aimed at achieving a reduction in greenhouse gas emissions by 2020 of 17 per cent, with emissions trading allowing an efficient means of achieving this. In Australia, Kevin Rudd’s Labor government plans to introduce quotas and emissions trading in 2011 to achieve a 25 per cent reduction in greenhouse gases by 2020.

But are there lessons to be learned from the European Emissions Trading scheme? The following articles look at some of the issues.